Stocks End Holiday Week Mixed

Friday, November 26, 2010
Stock Market Commentary:

Stocks closed mixed during this shortened holiday week as the euro plunged on fresh debt woes and tech stocks jumped on stronger than expected US economic data. The rally which began on the September 1, 2010 follow-through day ended on Tuesday. November 16, 2010 as stocks and commodities plunged in heavy trade. Wednesday marked day 1 of a new rally attempt, which means that as long as Wednesday’s lows are not breached, the window is now open for a new follow-through day.

Monday & Tuesday’s Action: Geopolitical Woes Send Euro Plunging:

On Monday, stocks and commodities fell as the USD rallied after Ireland’s political environment fell into turmoil. Over the weekend, Ireland’s government said it would accept an emergency aid package from the EU/IMF. However, on Monday, the euro plunged in heavy trade after failing at resistance (formerly support near 138) as fear spread that other EU nations will need to be bailed out. Elections are slated for January and the Green Party said it would pull out of Prime Minister Brian Cowen’s coalition due to the onerous debt woes. The last thing the country needs right now is political instability. It will be very interesting to see how this plays out over the next few months.

On Tuesday, stocks and a handful of commodities fell as the USD rallied after a slew of geopolitical threats sent investors rushing to so called “safe” investments (i.e. USD and Gold). Overnight, North Korea attacked a South Korean island and concern grew that Europe’s debt crisis will spread beyond Greece and Ireland. Elsewhere, several leading banks in China fell on concern that Beijing will raise their reserve requirements again. Before Tuesday’s open, the government said GDP rose at a +2.5% annual rate in the third quarter which topped the initial estimate of +2%. After Tuesday’s open, the National Association of Realtors said existing home sales fell in October which is the latest evidence that the beaten up housing market is still in shambles. At 2pm EST, the Federal Reserve released the minutes of its latest meeting which largely reiterated the recent Fed rhetoric and helped explain QE II.

Wednesday & Friday’s Action: Stocks Drift Lower As Geopolitical Tensions Mount:

Stocks soared on Wednesday as investors digested a slew of economic data and the geopolitical woes eased. This week the euro has been smacked hard as several EU political heavy weights expressed concern regarding the fate of the EU. German Chancellor Angela Merkel said on Tuesday that the Euro was in danger. On Wednesday, Ivan Miklos, Slovakia’s finance minister said the euro zone may break up or function with serious problems due to the ongoing debt woes.

The economic news was mixed but it was encouraging to see stocks rally which bodes well for the latest rally attempt. Before Wednesday’s open, the Labor Department said jobless claims fell which helped allay concerns that the ailing jobs market was not recovering. Elsewhere, durable goods and new home sales both fell short of analyst estimates which bodes poorly for the ailing housing market. US markets were closed on Thursday in observance of the Thanksgiving. Stocks closed early but fell on Friday amid fresh concerns that more EU nations (i.e. Spain & Portugal) will need to be bailed out.

Market Action- 12 Week Rally Ends – Week 2- In A Correction:

It was encouraging to see the bulls show up and defend the Dow Jones Industrial Average’s 50 DMA line. The 12-week rally ended on Tuesday, November 16, 2010 after the major averages plunged in heavy volume back down towards their respective 50 DMA lines. In recent weeks, we have repeatedly written about how the major averages were experiencing wide-and-loose action after a big move and made it very clear that that was not a healthy sign. At this point, we are looking for a new rally to be confirmed with a new follow-through day before taking any new positions. Caution and patience are key at this point. Trade accordingly.

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